In a recent ruling, the Supreme Court of India reaffirmed that a user who owns 26% of a captive power-generating project and utilizes 51% of its electricity could be classified as a captive user.

It also held that if a group of individuals constitutes the captive users, they must collectively possess a minimum ownership stake of 26% in the project and jointly consume at least 51% of the electricity generated annually.

The Court noted that the ownership threshold of 26% must be maintained consistently throughout the calendar year, alongside meeting the minimum electricity consumption requirement.

Additionally, the Court clarified that if members of a cooperative society collectively consume more than 51% of the electricity generated, the power project should be considered a captive generating project, and the society’s members are to be regarded as captive users.

The cooperative society may supply 49% or less of the aggregate electricity generated to third parties. Any third party who is not a member of the cooperative society will be a non-captive user and a consumer liable to pay a cross-subsidy and an additional surcharge, as applicable.

The Supreme Court considered three issues in view of the conflicting judgments of the Appellate Tribunal for Electricity (APTEL) in other cases. The issues were:

• Eligibility criteria for a captive generating project/captive user under Rule 3(1)(a) of the Electricity Rules.
• Interpretation of the second proviso under Rule 3(1)(a) of the Electricity Rules and, in particular, the words ‘association of persons.’
• Whether a company is set up as a special purpose vehicle (SPV) for generating electricity is an ‘association of persons,’ in terms of the second proviso to Rule 3(1)(a) of the Electricity Rules.

The Supreme Court clarified that the second proviso to Rule 3(1)(a) of the Electricity Rules, known as the proportionality principle, establishes a unified qualifying ratio. This ratio is determined by dividing the consumption requirement (51%) by the shareholding requirement (26%), resulting in a unitary qualifying ratio of 1.96%. This implies that for every 1% ownership stake in the captive generating project (CGP), the owner must have a minimum electricity consumption of 1.96% of the CGP’s generated electricity, with a permissible variation of +10%.

In practical terms, this unitary qualifying ratio should fall within the range of 1.764% to 2.156%. The calculation considers the shareholding requirement, which must be at least 26% in total, in relation to the electricity consumption requirement, which must not be less than 51%.

This approach determines whether the ownership and proportionate consumption criteria are met, allowing for a 10% variation in either direction. The Court observed that this interpretation serves as a safeguard against manipulative practices, preventing owners from engaging in actions that would constitute misuse or abuse of Rule 3(1)(a) of the Rules.

Such manipulative practices, referred to as ‘gaming,’ occur when a 1% or an insignificant shareholder of the captive generating project excessively utilizes the generated electricity. In such instances, these individuals should not be categorized as group captive users and, consequently, should not be entitled to the benefits granted to captive users under the Electricity Act. The prevention of gaming or misuse is essential to protect the interests of the distribution licensee.

Moreover, in situations involving changes in ownership, shareholding, or consumption, the weighted average principle should be applied to ensure compliance with the proportional electricity consumption requirement outlined in the second proviso to Rule 3(1)(a).

If a captive consumer leaves or withdraws from participation in the middle of the year, transferring their shareholding to another or a new captive user, it would be reasonable to expect the newly added captive user to consume electricity in proportion to the amount generated.

The apex court added that SPVs have a specific and singular purpose as outlined in the Rules: to own, operate, and maintain a generating station. An SPV cannot independently consume the electricity produced by the captive generating project because its sole function revolves around the ownership and operation of the generating station.

Consequently, it cannot be classified as a captive user since it cannot consume the generated electricity. Therefore, the underlying purpose and objective of companies or corporate entities in establishing an SPV, which cannot directly avail of the benefits provided to captive users, would be for such entities to collectively enjoy the shared advantage of becoming captive users.

According to the ruling, captive-generating projects can be put into two categories:

• Single-User Captive Generating Project: The first part of Section 2(8) refers to a power plant set up by any person to generate electricity primarily for his own use.
• Group User Captive Generating Project: The second part of Section 2(8) states that the power project set up by any person to generate electricity primarily for their own use includes a power project set up by any cooperative society or association of persons for generating electricity primarily for the use of members of such cooperative society or association.

The Court emphasized that according to the Electricity Rules, all group captive users, excluding registered cooperative societies, must adhere to the proportionality assessment outlined in the second proviso to Rule 3(1)(a), which pertains to the association of individuals, necessitates such captive users to meet the minimum ownership and electricity consumption criteria.

It clarified that SPVs that possess, operate, and maintain captive generating projects qualify as an ‘association of persons’ as defined in the second proviso to Rule 3(1)(a) of the Electricity Rules. Companies, corporate entities, and other individuals who are shareholders and captive users of a captive generating project established by an SPV must meet the criteria to qualify as captive users.

Commenting on the judgment, Aditya K Singh, Partner at Dentons Link Legal, said, “Reading of the judgment suggests that Supreme Court heavily relied on the expression ‘primarily for his own use’ for rendering this judgment. The Supreme Court accepted that there are two interpretations possible for Rule 3 (b) and went ahead with a narrower interpretation with the intent to stop the ‘gaming.’ With all due respect, Rule 3 (b) is an unambiguous provision, and the Supreme Court, in the catena of judgments, has held that the Court should interpret the wordings of law as it is (literal interpretation). Therefore, Rule 3 (b) should have been interpreted as interpreted by APTEL in Tamil Nadu Power Producer Judgment.”

Last month, in amendments to the Electricity Rules, 2005, the Ministry of Power reverted to the previous regulation, allowing collective captive users to hold the minimum ownership of 26% in a group captive open access project.

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